BUY AN INVESTMENT PROPERTY OR PAY MY 20K IN TAXES?

Question

Hey BP family! I am really needing some advice on this and I hope that I can explain it well enough for you to be able to answer my question.

So my situation is that I am self-employed (Realtor) and the last 2 years I have written off alot to be able to not pay much in taxes, so I only showed I made $45,000/per year. This year I will be grossing around $100k and I am told if I want to buy another property, that I cannot write off much this year to show "more" income. So this means that I will more and likely pay up to $20k in taxes! Which I don't want to do at all.

My question to you guys is, can I invest that $20k that I have saved up into a condo or SFR by the end of this year and NOT have to pay taxes? I know that there are a TON of benefits for owning real estate, I know some of my friends that are investors, don't have to pay a dime to the IRS. I am wondering if I am way off and just dreaming that this could be possible or if there is really a way to do this?

Linda Weygant · Answer

I also just want to point out that, even though you are self employed, you can't just choose to stop writing off certain expenses in order to inflate your net income.

While the IRS certainly won't care if you inflate your income and, therefore, the taxes owed, the mortgage company will certainly care that you have over-represented your net income and it's more generally labeled as mortgage fraud.

Whoever told you that you "if I want to buy another property, that I cannot write off much this year to show "more" income", was advocating mortgage fraud.

If you had 5000 in office supplies, you write off 5000 in office supplies and if you had 6000 in advertising, you write off 6000 in advertising.  Period.  End.  There is no choice to write off different amounts in order to play games with your income and taxes.

The only place where you might have some wiggle room is in business expenses that you pay personally, such as the mileage on your car or declaring a home office.  You can choose to keep those personally rather than deducting them in the business.

But from a mortgage underwriting perspective, picking and choosing which deductions to take can land you in jail.

Carl Fischer · Answer

think about Ira, 401k, HSA contributions to bring taxes down further. It is important to understand taxes and how they work in the USA. Practice on turbo tax or work closely with a cpa and or take some online classes.

James Wise · Answer

Unless your putting the $20k into a self direct IRA then buying the property with the IRA you will need to buy the property with after tax dollars.

You should note that if you use an IRA to buy a property you are not allowed to be involved with the management of the asset in any way. So if you plan on self managing your just going to have to pay those taxes.

Melissa Harris · Answer

@Linda Weygant I honestly did not know this!!! How scary, now that you say it and explain it to me, I can see exactly why it would be mortgage fraud. Thank you so much for responding back to this post! This opened my eyes for sure.

Melissa Harris · Answer

@Jay Hinrichs I never thought about the SEPP before, could you explain a little bit more about how a SEPP works? Or should I talk to my CPA about this? And I am starting to look for partners as we speak on investing 50/50, I am out there looking for deals now to be able to approach these potential partners with these deals.

I do own my house and been in there for 2.5 years now, I plan on selling it next year as I will be able to make a little over $100k, I ran numbers to rent it out but the cash flow is just not good.

Jay Hinrichs · Answer

take every right off you can.. money sent to IRS you NEVER get back.. reduce that cash drain.. start your SEPP use sepp to buy performing mortgages... maybe think of investing with partners on cash flow real estate.. and if you don't own your primary do that first.

Melissa Harris · Answer

@Carl Fischer great idea! I will certainly talk to my CPA about making contributions into my IRA, I am still learning all of this and what I can do to reduce my taxes but still show great income.

Melissa Harris · Answer

@Tommy F. I just got that number from what I had to pay back in 2013, I think I had the WRONG CPA, I was even paying quarterly and I still had to owe $20,000. It didn't make sense to me but being new into real estate and being self-employed, I was just trusting in her and what she was telling me. I don't know much about how taxes work or what I have to pay honestly but that link really helps! Thank you for sharing that link and giving me that insight!

Tommy F. · Answer

@Melissa Harris

I'm not quite sure I get your assessment of the situation.  If your gross earnings are $100k, let's assume you take the standard deduction and just call $100k your adjusted gross income (AGI), and you file single, then you'll pay $10,452.50 plus 25% of the excess over $75,900 which comes out to $6,025. Your federal tax will be roughly $16,477.  https://taxfoundation.org/2017-tax-brackets/

Depending on your State, there could be another 5% to 10% or so.  If you have legitimate expenses to reduce your tax liability meaning you've incurred an expense and paid cash for those expenditures, then reduce your tax liability and report the proper expenses.  I don't understand how "not" taking the expense deductions to reduce taxes saves you $20k by reporting "more" income.  To whom do you want to report more income?  A bank?

Melissa Harris · Answer

@Josh C. that is what I needed to know, thank you!

BUY AN INVESTMENT PROPERTY OR PAY MY 20K IN TAXES?

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